SEC charges owners of New Jersey Deli with a $100M Valuation
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The SEC brings the hammer down on about two crypto scams a month. This month, Sparkster, Ltd., and Chicago Crypto Capital, Inc. Last month, Dragonchain, Bloom, and Crypto Crusaders.
The SEC is still working on the crypto scams of 2018-2019. Remember Initial Coin Offerings? There's a big backlog of those. So they haven't gotten to NFTs and DeFi yet. Soon, though. The SEC just doubled their crypto enforcement staff.
With NFTs, if you sell something that already exists, it's a collectable. That's probably OK. If you sell something that doesn't exist yet, such as metaverse land for a metaverse that isn't running, that's probably not OK. That's a security offering. See "Howey Test".
One problem with this narrative is that they managed to kill off Kik/Kin and Telegram TON before they launched but they let other pump and dumps play out. Clearly it's possible for the SEC to do their job effectively but they just aren't doing it.
(Not to mention Libra/Diem which was an outlier.)
Going by this[1] SEC complaint from 2019 Kik had already illegally sold $55 million worth of tokens to investors in 2017. I am not sure how you can look at these dates and get a "before" out of it, especially since it seems that some sort of launch did happen.
I'm not sure what's going on with Kin specifically because they lost the SEC case in 2020 but their website makes it look like it's still happening. (If you define constantly switching blockchains as happening.)
From your tone it seems to me like you think the injustice here is that Kin and TON should have been allowed on the gravy train too?
Stock fraud? Wow should have done crypto. Guy got murdered? I wonder if the hitman was paid in crypto!
I could at least understand a blockchain (meat-chain? ew) based on Deli products.
I knew I come to HN for a reason…
This the funniest thing I’ve seen all day. I actually laughed out loud…
If I read an article about people artificially inflating the price of something in a pump and dump scheme, I pattern match that to crypto. I’m tired of hearing about it, too, but I to stop hearing about it because someone regulated the fraudsters out of business, not because defrauding unsophisticated people became a norm we don’t criticize.
Fraud is not exclusive to crypto, it's just laughably easy.
Look, there are plenty of technologists who are very into crypto. You can find lots of them here.
But to many, it reeks of some long-reviled parts of the tech scene: vaporware and marketing hype. And that's before you get into the astounding levels of fraud and waste.
At this point, crypto is much more of a social phenomenon than a technological one. That's not a problem in itself. The issue is that foundation is one where legimately interesting technology is neither necessary nor sufficient to solve very many real-world problems, but the financialization at the core of it facilitates these collective delusions that it is.
Everyone's LARPing the original dotcom bubble, but the world's entirely different. The dotcom bubble certainly had its crackpots, but it also had a lot of people who accurately saw that pervasive networking was going to unlock massive opportunity. But the low hanging fruit has been plucked over the past 25 years.
Web3 people are trying to tell the world that a decentralized permissionless log is as the same magnitude of technological impact, and it simply isn't.
One of the reasons why everything about crypto is bad is because the technologists who are into it can tell you what the code does, but the "business people" who are into it can't tell you why this crypto use case couldn't/shouldn't be backed by a centralized database. Literally name a use case and I will tell you how a centralized database would be better.
Even if the Internet boom of the late90's was full of grifters, at least most could explain why an email is better than a letter,
The problem is that a blockchain can only trustlessly and verifiably encode things that are wholly represented on-chain. As soon as you bridge it to anything in the real world you're relying on some degree of trust, and trustlessness is all-or-nothing.
That's why only proper un-backed-by-anything cryptocurrencies actually make any sense - they're wholly on-chain. On the other hand their value flails around wildly like a balloon you forgot to tie off and that limits their practical value to basically nothing. Their monetary policy is in the hands of some un-elected group of randos accountable only to their own enrichment.
Stablecoins: who knows whether they're redeemable? You just have to trust the issuer and the legal system. They also get frozen all the time - Tether freezes more tokens than anyone and there's zero process and probably zero backing. Even Circle/USDC lied about their backing.
Deeds on the blockchain: not your keys not your house? Ok, no thanks? If you have to rely on the court to have final say then the real world diverges from the chain and of course then why even have a chain?
The iron law of blockchain is "if you think the blockchain is a good solution to any given problem you either don't know enough about the blockchain or you don't know enough about the problem."
It's not clear they're anything more than a technological curiosity that's been coopted by anarchocapitalist libertarian grifters.
The thing blockchains _can_ be better at than a classic SQL database is tamper-evidence, but that's also possible with less overhead using classic PKI and/or Merkle trees. Using trusted third-parties to sign things could be better if something came to a court or other public form because then you'd be able to have some institutional weight rather than random internet strangers: “My filing record was signed by the USPTO and their signature was notarized by the DPMA before the date when the other party claimed…” sounds better than having to explain to a court why it's unlikely that you were able to suborn miners to favor your transaction.
Except the legal system doesn't have to go after the blockchain per se, they go after the users who still have to have some way to access the value in it.
Maybe, with absolute perfect OpSec, you can use a "censorship resistant blockchain" to finance your ($politically_unpopular_activity), but it's going to be very difficult to get mainstream users involved in a platform that could become increasingly radioactive.
Eventually it becomes a legal death spiral-- as mainstream opportunities leave the network, so does the legal fig leaf for participation.
People bring this up a lot.
1) In practice, blockchains get censored and edited all the time when mistakes happen.
2) I don't see the advantage vs. a publicly readable database that a distributed set of users can archive in a cryptographically secure way. Again, blockchain's main failure point is that it does what centralized databases (which can be cryptographically secure, some even are!) do, but it takes 200x more effort to do it.
Money laundering, purchasing illegal substances, or paying ransom.
The advantage crypto has is that noone will set up that centralized database (because it would be stupid too!).
This type of investing has long been done on paper, but the blockchain makes it much more liquid. Selling your fractional ownership in a property was onerous at best, and took a long time and a lot of fees.
Now it's just sending a token to someone else in exchange for money (fiat or crypto).
Another advantage is that it doesn't matter if the facilitator goes out of business, because all the ownership records are on a public blockchain instead of their secret central database.
I generally agree with you, A LOT of crypto is crap and could be better solved with a central database. But there are valid use cases.
Also, this comment nails it: https://news.ycombinator.com/item?id=33002963
And yes it’s backed by a paper contract. That’s why I’m ok with it. But it’s still gives me liquidity and ownership security I couldn’t get with a central database.
> backed by a paper contract
So.... What's the point of blockchain in this case? Other than "hey, we have blockchain"?
> But it’s still gives me liquidity and ownership security
What gives you ownership security is the paper contract, not some bytes in some database.
For everything you want a c corporation provides the exact same guarantees while not becoming a money laundering hotspot
Fractional ownership in real estate has a long history of scams.
Being digital makes it much more liquid. There's literally nothing about fractional real estate ownership that needs distributed consensus.
>Another advantage is that it doesn't matter if the facilitator goes out of business, because all the ownership records are on a public blockchain instead of their secret central database.
You could solve that problem by only working with companies that have publicly readable centralized databases? Again no need for distributed consensus.
But I think that the distributed-public-database thing has real value. Companies come and companies go, and opening up data to the scrutiny of daylight is sorta a prisoner’s dilemma problem much of the time. Building a long-lived business on top of a by-design-public data store seems like a really cool thing.
Sure, any company could decide to host a Postgres instance on AWS with world-readable creds. But does that happen? And what happens when the company goes under? Who keeps paying the AWS bills?
Kinda a pessimistic view, and there is some value to centralization (e.g. Apple and Google probably contributed more innovation than a sea of small startups) but there's also a cost.
Businesses in general tend to consolidate over time.
I didn't originally despise crypto. I remember reading the original bitcoin whitepaper and thinking how genius it was. But I did come to loath crypto over time for 3 reasons:
1. As has been abundantly clear, crypto seems to be a haven for all sorts of hucksters and fraudsters looking for an easy way to commit their fraud, while adding nothing of value.
2. Crypto has developed into this weird cult where people actually believe the meme-y nonsense of r/Bitcoin.
3. Most importantly, though, I came to understand that the fundamental reason for crypto to exist, that you can have irreversible transactions without needing a trusted middle man, is a horrible idea. My favorite very recent simple example of this: Crypto.com is suing a woman to recoup $7 million they accidentally refunded to her because an employee put the account number into the amount field. I.e., they made a payment mistake, and to rectify that mistake they are using the time-honored court system to make judgements about who actually deserves the funds. Crypto.com should be thanking their lucky stars they didn't refund her in actual crypto...
NFTs were an attempt to evade the rules on public offerings. If an NFT represents a real thing, even a silly real thing such as a Bored Ape picture, then it's probably a collectable, which the SEC does not regulate. But if an NFT is tied to something that doesn't exist yet, it's an investment. Also, once huge "NFT collections" and "fractional NFTs" became a thing, they started looking more like securities.
There's a a long history of attempts to evade security registration by claiming your new thing is different. It hasn't worked in the past. The "Howey test" came from a 1949 attempt to sell the right to harvest oranges from orange groves in Florida to large numbers of people nowhere near Florida.
The process for simply registering an IPO with the SEC isn't what holds back crypto issuers from doing it. It's that you have to file a prospectus, explain who you are, who's involved, their backgrounds, and what you're going to do with the money. Under penalty of perjury. What crypto people call a "rug pull" quickly results in felony charges.
Pretty much everything that had become regulated on on Wall Street had found a new home.
"Pink sheets! Got your pink sheets `ere!"
Far too many to keep track of, many simply walked away winners.
"The SEC's order finds that Bloom violated the registration provisions of Section 5 of the Securities Act of 1933. In its offer of settlement, Bloom is undertaking to register the Bloom Tokens with the Commission and conduct a claims process to compensate investors who purchased the tokens. Bloom agreed to pay a $300,000 penalty, and the order includes a provision for an additional springing penalty, up to the value of the offering proceeds, for a total possible penalty of $30.9 million, if Bloom fails to complete the claims and registration processes."
There's a slow process, but there should be refunds at the end of it.
In the context of a securities transaction, a manipulative act is one that sends “a false pricing signal to the market” and therefore does not reflect the “natural interplay of supply and demand.”[1] It is typically undertaken to create a false image that the security’s value is based on supply and demand, and thereby induces unwitting investors to buy the security. Market manipulation is regulated under a number of statutes and rules. Most notably, Section 9(a)(2) of the Securities and Exchange Act (Exchange Act), titled “Manipulation of Security Prices,” prohibits transactions in certain securities that create “actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.” [2]
https://www.arnoldporter.com/en/perspectives/publications/20...
How dare you bring your fancy pants “facts” into this convo?
Just kidding. Good info thanks for posting.
> a manipulative act is one that sends “a false pricing signal to the market” and therefore does not reflect the “natural interplay of supply and demand.”
That sounds like 75% of my short stint in marketing. I know… forgive me for I have sinned.
The company had a great list of clients who were tech firms known themselves to be savvy at marketing. This and a solid Series A let me to think there was product/market fit. Then my task during the first week, as the only technical guy in a small marketing department was to take down from their website 27 of the 30 companies listed since they’d only done a 30 day trial and were now screaming to be taken off. Oh, good times…
And, yes, I was marketing marketing software to marketers.
https://www.businessinsider.com/former-moviepass-executives-...
...but I don't get why those other people would do that, buy those shares at all? Why would this fraud even work at all? Who sees some OTC stock trading at some value and says, oh I'll buy a bunch at that price too, even though I don't know the first thing about this company at all?
Why does this scam work at all -- who falls for it? Or is there some step here that I'm missing?
It's interesting the use of the phrase "investors". I say this because there is a difference between "the public in general" and "investors" having faith in "the markets".
As we go into a downturn (over here the UK feels like Slim Pickens clinging on the bomb and whooping as we fall), we need to be careful about whose market is being protected.
I think I am saying that even if the SEC is making sure no-one at the poker table is dealing from the bottom, there are millions who are not at the table, and millions more who feel the whales are taking way more than they should be able to.
If most people feel they are getting screwed, saying "we protect the integrity of the market" might not help.
The SEC is a bunch of working stiffs too but their assembly line is the integrity of the US financial markets. Anything outside of that is beyond their jurisdiction.
This is not the SEC's remit. To the degree it's anyone's remit, it's the Fed, Treasury and the CFPB's job.
But yes, it's why we cannot hope to leave it to the SEC or the Fed. The UK just learnt what happens when the Government and the central bank disagree on even the most basic questions.
If it's about making it easier to invest in the stock market, then what's so hard about it now? Lots of non-rich people are in it now (especially if you count retirement funds), and investing in index funds is an easy way to get a historically reliable 8% return.
If it's about rich people not paying their fair share of taxes, then how much would be enough? Is it a certain percentage, or a certain compliance rate, or just until you stop hearing from the New York Times about how this-or-that company is paying too little? By the way, if it's about this, I'd encourage you to make friends with a company owner in the $1-10 million per year range. Ask them about how much tax they pay, and how much time and money they spend on compliance. Ask how their tax rate compares to their secretary.
You were kind of vague, so I'm only guessing here-- apologies if I'm way off the mark!
Five years later, that top 0.1% will still be dodging taxes. Naturally, not a single one of them will have been held accountable or gone to jail. However, the resources provided by the popular movement will have been used to audit and harass the $1-10 million businesses and individuals.
Some of them will have been cheating a little. Maybe a personal vacation deducted as a business expense -- stuff like that. Nothing compared to what Amazon is doing, of course. But they'll be audited, and they'll be nailed. Most of them will may a major fine. A few will do 1-3 years in a Federal minimum security prison.
Or maybe they'll catch a grandma who inherited a European bank account from her family. She didn't dodge any taxes, but she didn't know that she was supposed to report that account every year on a special form. When she later amends her filings to comply with the law, they'll take her amended filing as a confession and nail her for $2 million, or half the value of the account. [1]
But forget about her, it's time to hire another 87,000 IRS agents. Does anyone really think they'll be used to go after Amazon?
To be fair to the person you replied to, I think we can assume this kind of company was not the category they were thinking of. Many companies with less than $10 million annual revenue are struggling to stay afloat.
For a moment, I had trouble remembering whether that assertion was in the context of getting screwed by the government or by freeloaders. I think to avoid people feeling screwed, we'd need to focus the conversation on what people receive from the government rather than what they or others give.
In my opinion, most small-time traders have no business being in the stock markets in the first place, except if it’s relatively safe index funds administered by the likes of Vanguard and BlackRock.
Small time investors who know what they’re doing have been buying index funds for the past 40 years and making great returns
– Single New Jersey deli boasts a $105M market cap, despite $14K in sales https://news.ycombinator.com/item?id=26836367
– Everyone Loves the $100M Deli https://news.ycombinator.com/item?id=26867465
Paywall/Archive: <https://archive.ph/PL5lI>
This also validates Levine's dictum: everything is securities fraud. <https://archive.ph/k36EO>
This sounds kinda like a SPAC tbh.
More interesting is all of the Chinese scam stocks that managed to get NYSE or NASDAQ listed.
And what a lot of people don't realize is that the SEC can not bring criminal charges… which is what most people think of when they read, "SEC charges." But the SEC can only bring civil action. While they can recommend a case to the DOJ, they rarely do. Maybe someone else knows why? Because I don't.
With $40,000 in real revenue, this is a case of people with nothing to lose. They bet big and lost. The penalty is basically go back to zero… which is pretty close to where they started.
One of the reasons I truly believe (perhaps misguided) in more equitable distributions of wealth is that I believe it would massively cut down on scams… of which everything seems to be these days. If people were not so desperate, and they risked losing something (UBI, their benefits, and the quality if life that could provide, etc.) maybe every other thing wouldn't be a freaking scam or scheme of some sort.
Disclaimer: I have become extremely jaded, particularly in the post-COVID world. I see a new coffee shop open up and I instantly start to wonder, "What manner of scam is going on here?"
Penultimate paragraph: "in a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Patten, Coker Sr., and Coker Jr."
Worse than that. They're facing criminal charges. If they get thrown in prison for a couple years, I'd argue they don't just go back to zero, they go negative. It's hard to get a job with a criminal record that includes fraud.
So the valuation before the gross inflation was $7M? Even though that makes 14 times less sense, it still seems a bit high.
edit: Apparently I missed the follow-up, in which he did get to try the cheesesteak https://defector.com/despite-stellar-cheesesteaks-hometown-d...
Matt Levine's brilliant Bloomberg take is worth revisiting: Archive: <https://archive.ph/PL5lI> Discussed on HN at the time: <https://news.ycombinator.com/item?id=26867465>
Investors make their own valuations to figure if something is actually cheaper or more expensive than other people make it.
It is literally the whole point of investing -- you are trying to figure out if what you are getting for your money is more valuable than the cash in hand.
On the other hand anybody should be able to make their own opinion of what is the value of the company based on the data. Everybody who sells will want to increase the "official" valuation and everybody who buys will want to do as cheap as possible. Everybody is free to try to sell at any price they want and everybody should be free to decide not to buy it.
There are certain exceptions... but stock exchange I think should not be one of them.
[1] https://www.bloomberg.com/opinion/articles/2021-04-30/hometo...
EDIT: Context - https://www.wsj.com/podcasts/the-journal/people-of-the-state...
SPACs are reverse mergers with bells and whistles. Reverse merger just means a private company mergers with a public company, the shell, where the motivation for merging is that the shell is public.
Shells are usually vestiges of a failing or failed company. They went public because they thought they would idk sell sandwiches, they didn't sell enough sandwiches, so now their most valuable asset is the listing itself. When they are bought, there is no cash or goodies for the new owner to control. If anything, the less there the better.
SPACs go public with the ex ante intent of merging with a private company. When they merge, they dangle the promise of their pool of cash to potential acquirers. It's more deliberate, complicated and lucrative (for the bankers).
https://www.bloomberg.com/opinion/articles/2021-04-20/hometo...
The pastrami must be amazing. Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators – who are supposed to be protecting investors – appear to be neither present nor curious. From a traditional perspective, the market is fractured and possibly in the process of breaking completely.
Discussed at the time (h/t mesofile): <https://news.ycombinator.com/item?id=26867465>
If you don't have an answer, just say that.
I am aware that the final buyer ended up paying more that they would otherwise have needed to. But that was not the question: they, too, knew exactly what they were getting.
I would rather see SEC do something about ICOs.
Purchasing some shares in their own company for more than they were 'worth', in the hope this would deceive other people into doing the same?
Doesn't really sound like it should be a crime any more than Walmart is committing a crime for selling some goods for far more than they're 'worth'.
[1] https://www.businessinsider.com/congress-stock-act-violation...
https://www.congress.gov/bill/117th-congress/house-bill/2655
is currently aimed at this problem.
This goes to show how tough the feds are when it comes to white collar crime, contrary to the popular myth that the US is soft on white collar crime. https://greyenlightenment.com/2021/12/03/the-myth-of-white-c...
Again, this is assuming you get caught, but if you do, you're rfuckked...I dunno why anyone would engage in securities fraud; your adversary is the U.S. federal govt. --the most powerful entity in the world with unlimited resources and known for making examples out of criminals.